103 Remedies on Breach

• Jurisdiction: Arizona

(a) Measurement of Damages for Breach of Covenant

The measure of damages for a failure to fully perform is the cost to correct or complete performance. However, if unreasonable economic waste would result from such correction, the measure is the difference in value between what was contracted for and what was rendered.

In Jacob & Youngs, Inc. v. Kent, 129 N.E. 889 (1921), Justice Cardozo set forth the following rule for measuring damages where a failure to fully perform was held a breach of covenant rather than a failure of condition:

It is true that in most cases the cost of replacement is the measure. The owner is entitled to the money which will permit him to complete, unless the cost of completion is grossly and unfairly out of proportion to the good to be attained. When that is true, the measure is the difference in value.

Id. at 891 (citation omitted).

This rule was applied in Blecick v. School Dist. No. 18 of Cochise County, 2 Ariz. App. 115 406 P.2d 750 (1965), which involved a contract to construct school rooms. The school board withheld final payment because of defective work. In an action by the contractor to recover the contract balance, the lower court granted the counterclaim of the school district for the cost to repair faulty workmanship. The contractor, alleging that the defects were not substantial, had argued that the school district was entitled only to the reduced value resulting from breach rather than the cost to correct the defective work. The court disagreed and stated that “[t]he value rule comes into play only when the defects cannot be remedied to conform to the contract without substantial destruction of the building, i.e., such destruction as would amount to `economic waste.’” Id. at 123.

In affirming the decision of the trial court, the court adopted the rule found in Restatement of Contracts § 346(1)(a) as follows:

(a) For defective or unfinished construction, [the owner] can get judgment for either

(i) the reasonable cost of construction and completion in accordance with the contract, if this is possible and does not involve unreasonable economic waste; or

(ii) the difference between the value that the product contracted for would have had and the value of the performance that has been received by [the owner], if construction and completion in accordance with the contract would involve unreasonable economic waste.

Id. at 122.

The court stated that the burden was on the contractor to affirmatively prove that economic waste would result from the repair of the defects.

Blecick was cited on this point in Sorenson v. Robert N. Ewing, General Contractor, 8 Ariz. App. 540 448 P.2d 110 (1968), an action by a general contractor against a subcontractor for improper work done by the subcontractor. The court held that the contractor was entitled to the reasonable cost of remedying the defects, in the absence of a claim that unreasonable economic waste would occur. The court held that it was not necessary for the contractor to show that he in fact made the repairs or was required to do so. It was sufficient only to show the necessity and cost of remedying the work.

In Economy v. Frohme, supra, the court also favorably cited the ruling in Blecick that the burden is on the party breaching the contract to show that economic waste would result from remedying the defects.

County of Maricopa v. Walsh & Oberg Architects, Inc., 16 Ariz. App. 439, 494 P.2d 44 (1972), involved the breach of an architectural contract for design of the county complex in downtown Phoenix. After completion of construction of the roof, the underground garage leaked. The leak was not discovered until after landscaping had been planted over the garage. The cost of waterproofing the roof of the garage would have been from $350,710 to $498,169, 75% of which would have been incurred in removing and then replacing the landscaping. Alternatively, the leaking could be eliminated by installing drip pans and replacing damaged property for a total cost of $107,358.

The trial court granted the county damages in the sum of $107,358 on the grounds that removing and replacing the landscaping would constitute economic waste. The court of appeals affirmed this decision and adopted Restatement of Contracts § 346(1) for determining whether economic waste would result from remedying the defects. The court quoted comment 6 to that section:

Sometimes defects in a completed structure cannot be physically remedied without tearing down and rebuilding, at a cost that would be imprudent and unreasonable. The law does not require damages to be measured by a method requiring such economic waste.

Id. at 441 (court’s emphasis).

The court repeated that the burden is on the party breaching the contract to show that economic waste would result from remedying the defects. Here, that burden was met.

In Fairway Builders, Inc. v. Malouf Towers Rental Co., 124 Ariz. 242, 603 P.2d 513 (App. 1979), the trial court awarded cost of repair where an improper finish was applied to exterior walls, even though the cost involved was for tearing down the walls and reinstalling them. The trial court was affirmed by the court of appeals, which found reasonable evidence to sustain the trial court’s finding. The contractor had failed to sustain his burden that tearing down the walls involved unreasonable economic waste. The exterior appearance of the walls was held to be significant because the office building involved was located on a main Phoenix street.

The cost of repair was measured as of the time of trial, rather than the time of the breach. The court held that the determination of the appropriate time was within the sound discretion of the trial court. Since the amount of the cost was unliquidated, there would have been no prejudgment interest, and an award based on the cost at the time of breach would have lost value by the time of trial because of inflation.

The contractor’s contention that the owner did not mitigate damages by repairing immediately was rejected. The injured party must exercise reasonable care to mitigate damages. No extraordinary or risky actions are required. The party in breach has the burden of proving that mitigation was reasonably possible but not reasonably attempted. Id. at 255.

There is also an extensive discussion in Fairway Builders of when prejudgment interest should be awarded. The usual rule is that prejudgment interest is awarded if the claim is liquidated, which means that there is a basis for precisely calculating the amounts claimed. Apparently this would not apply to a quantum meruit claim but was applied in this case to cost plus 10%. However, prejudgment interest cannot be awarded for the period prior to the first demand for payment. Damages for improper work apparently does not carry prejudgment interest.

Where an award for an unliquidated counterclaim is offset against an award for a liquidated claim, the offset is deducted before calculating prejudgment interest on the liquidated claim, but only if both arise from the same contract.

Elar Investments, Inc. v. Southwest Culvert Co., 139 Ariz. 25, 676 P.2d 659 (App. 1983), involved the damages recoverable by a developer for late and faulty delivery of materials by a material supplier. The material supplier had a $30,000 contract to deliver prefabricated steel for construction of fifteen townhome units. The steel was delivered late and with numerous deficiencies. The result was over six months’ delay in completion of the units.

The developer was awarded $91,000 (less $10,000 due on the contract) for the delay, including extended interest costs. The trial court found that such delay damages were within the contemplation of the parties. The trial court denied “loss of investment” because it was not within the contemplation of the parties. The award was affirmed, although the damages were three times the amount of the contract.

See the discussion of New Pueblo Constructors, Inc. v. State, in Section 806, regarding various possible measures of damages in an action by a contractor against the state. Presumably, the same principles would apply against a private owner in similar circumstances.

(b) Lost Profits

A contractor not given as much work as provided for in the contract may sue for the anticipated profits on the portion of the work that was not provided. (A specified remedy in a contract is not an exclusive remedy unless the intent of the parties to that effect is made clear.)

In Zancanaro v. Cross, 85 Ariz. 394, 339 P.2d 746 (1959), the owner contracted with the contractor to provide plumbing for fifty houses which were being constructed by the owner near Kingman. Prior to signing the contract, the owner did not inform the contractor that the subdivision was being financed on the basis of “ten and ten,” whereby each group of ten houses must be sold before the next group of ten could be financed. Only twenty-five houses were completed.

The Arizona Supreme Court upheld a judgment for lost profits on the written contract. It held that the owner breached the implied duty to construct the second twenty-five houses. This duty was implied in obtaining the contractor’s promise to provide the plumbing for those houses. The court pointed out that an implied promise is as much a part of a contract as a written promise and, thus, subject to the same penalties for breach.

Since the contract provided no specific time period, the court found that the owner had implied that the houses would be finished within a reasonable time. The trial court found this to be five to six months for construction of the fifty houses.

The contract provided that the plumber could increase the price for unusual delay. The owner alleged that this was the contractor’s exclusive remedy, barring the common-law remedy to cease performance and recover lost profits. The court held that a remedy provided in a contract would not be an exclusive remedy, barring common-law remedies, unless the intent of the parties to that effect...